Member Services Life Ins. Co. v. American Nat. Bank and Trust Co. of Sapulpa, s. 96-5122

Citation130 F.3d 950
Decision Date15 December 1997
Docket NumberNos. 96-5122,96-5183,s. 96-5122
Parties97 CJ C.A.R. 3474 MEMBER SERVICES LIFE INSURANCE COMPANY, doing business as Member Service Administrators, as Third Party Administrator of the Liberty Glass Company ERISA Qualified Employee Benefit Plan, Plaintiff-Appellee, v. AMERICAN NATIONAL BANK AND TRUST COMPANY OF SAPULPA, as guardian of William Brooks Balthis, Debra Leanne Balthis, and David Douglas Balthis, Defendant-Appellant, and E. Terrill Corley, Thomas F. Ganem, Steven R. Clark, Bradford J. Williams, and Walter M. Jones, Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)

Sam T. Allen IV, Loeffler, Allen & Ham, Sapulpa, OK (Sam T. Allen III with him on the briefs), for Defendant-Appellant.

E. Terrill Corley, Corley & Ganem, Tulsa, OK (Thomas F. Ganem with him on the brief), for Defendants-Appellees.

Phil R. Richards, Richards, Paul & Richards, Tulsa, OK (Thomas D. Hird with him on the brief), for Plaintiff-Appellee.

Before SEYMOUR, Chief Judge, EBEL and BRISCOE, Circuit Judges.

SEYMOUR, Chief Judge.

Member Services Life Insurance Company, doing business as Member Services Administrators (MSA), brought this action under section 502(a)(3) of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1132(a)(3), and federal common law to recover payments it made under an ERISA welfare benefit plan to American National Bank and Trust Company of Sapulpa (ANB), the guardian of minor children who were beneficiaries of the plan. MSA claimed the right to recoupment based on the contract as well as on principles of unjust enrichment, restitution, and equitable subrogation. The district court granted summary judgment for MSA, ruling that it was entitled to recovery under an amendment to the plan providing for subrogation. ANB appeals and we reverse.

I

The underlying facts are undisputed. MSA administers a self-funded ERISA welfare benefit plan established by the Liberty Glass Company. Jeff Balthis, the father of the minor children for whom ANB is the guardian, is an employee of Liberty Glass and his minor children are beneficiaries under the plan. In February 1988, the minor children suffered severe injuries in a fire caused by a BIC lighter, and the plan thereafter paid $570,368.75 in medical expenses incurred by the children. At the time these benefits were paid, the plan did not contain a provision permitting the recoupment of benefits from funds obtained by a beneficiary from a third party tortfeasor. Although the plan from its inception had provisions permitting it to be amended or modified, it had no provision addressing whether such amendments could be given retroactive effect. In October 1988, the plan was amended to add a provision giving MSA a right of recoupment if a beneficiary received money from a negligent third party as a result of injuries for which the plan had paid benefits. The amendment provided that it was retroactively effective as of March 1, 1988.

ANB as guardian of the minor children brought an action against the BIC Corporation on April 1, 1990, alleging that BIC was liable under the doctrine of product liability for the injuries to the children. ANB was represented in its suit against BIC by E. Terrill Corley, Thomas F. Ganem, Stephen R. Clark, and Bradford Williams (the attorneys) pursuant to a court-approved attorney fee contract under which the attorneys were to receive a fee of fifty percent of all amounts collected after the deduction of case expenses. While the lawsuit was pending, MSA made a demand under the 1988 amendment for reimbursement of the medical expenses MSA paid on behalf of the children from any judgment or settlement in the suit. The attorneys rejected the claim, pointing out that the amendment upon which MSA relied allowed recoupment from a recovery based on negligence, and the claim against BIC was based only on the theory of product liability. A judgment was entered against BIC on October 26, 1992, for actual and punitive damages, and ANB ultimately recovered $19 million on behalf of the minor children. BIC was held liable solely on the basis of product liability and was specifically found not to have been negligent.

On January 1, 1993, the 1988 amendment was modified to authorize recoupment of any monies received by a beneficiary from a third-party tortfeasor held liable under any theory of law or equity. This amendment required that such funds be held in trust until paid in satisfaction of the plan's right of recoupment, and further provided that the amendment was retroactively effective as of August 1, 1987, the date of the plan's inception. Contemporaneously with the payment of the judgment by BIC, $570,368.75 was placed into escrow pending a determination of MSA's ability to enforce its right of recoupment under the 1993 amendment.

MSA brought the instant action against both ANB and the attorneys to recover the funds placed in escrow, as well as interest and attorneys fees expended in obtaining the funds. Defendants responded that the plan, as a contract between the parties, could not be retroactively amended to deprive the minor children of benefits. As an alternative counterclaim, defendant attorneys asserted that if MSA were awarded the escrowed funds, the attorneys were entitled to fifty percent in accordance with their fee contract. Although MSA recognized that the fee agreement between the attorneys and ANB could generate a claim by the attorneys to some or all of the escrow funds, MSA asserted that its claim was superior to that of both ANB and the attorneys and that it was therefore entitled to the entire amount. MSA also sought an adjudication that the minor children were not entitled to the payment of future benefits from the plan until each child's expenses equaled the amount of the judgment awarded to that child.

The district court ruled in favor of MSA, holding that the 1993 amendment could be applied retroactively to enable MSA to recoup payments paid to the beneficiaries before the amendment was enacted. The court also ruled that MSA's obligation to pay future benefits on behalf of each child would not arise until that child had exhausted the amount of his or her judgment. 1 Finally, the court held that the attorneys were entitled to receive a fee in connection with the escrowed funds. Although the court observed that "if the attorneys had been unsuccessful in prosecuting the state court lawsuit, [MSA] would not receive any recoupment whatsoever," the court nonetheless held that "[t]o the extent that the payment of the attorneys' fees decreases the escrowed amount available for recoupment, [MSA] will be entitled to recoupment from the portion of the judgment not currently held in escrow." Supp.App. of Atty. Aplees. at 182-83. The court's ruling in effect relieved MSA from the obligation to pay any attorneys fees and placed the entire fee responsibility on ANB, as the court subsequently held in a supplemental order. Thus, the court awarded fees to defendant attorneys against their own co-defendant client even though the attorneys had asserted no claim against their client by way of a cross-claim or otherwise.

On appeal, ANB and the attorneys assert the court erroneously applied the 1993 amendment retroactively to allow MSA to recover expenses it had paid prior to adoption of the amendment. ANB alternatively raises several challenges to the district court's ruling that the attorneys fee award must be paid out of funds not held in escrow. ANB argues in essence that this ruling granted the attorneys relief they did not request against their own client, whom they did not sue. Specifically, ANB contends the entry of this judgment violated its due process rights, was based upon a misreading of the fee agreement, and deprived it of its right to a jury trial. The attorneys argue alternatively that if MSA prevails, MSA should share in the payment of the attorneys fees for services rendered on its behalf and with its knowledge and approval. We hold the district court erred in determining that the 1993 amendment could be applied retroactively to allow recoupment of benefits already paid, and we therefore need not consider the propriety of the fee ruling. 2

II

ERISA regulates two types of benefit plans, pension benefit plans that create vested rights and welfare benefit plans that need not create vested rights. See Chiles v. Ceridian Corp., 95 F.3d 1505, 1510 (10th Cir.1996). The plan at issue here is a welfare benefit plan. As such it is "exempt from the statutory vesting requirements that ERISA imposes on pension benefits. Accordingly, an employer may amend the terms of a welfare benefit plan or terminate it entirely." Wheeler v. Dynamic Eng'g, Inc., 62 F.3d 634, 637 (4th Cir.1995) (citations omitted).

"However, benefits under a welfare benefit plan may vest under the terms of the plan itself." Id. at 637-38. Because, as MSA agrees, an amendment to any ERISA plan may not operate retroactively if that amendment deprives a beneficiary of a vested benefit, see Chiles, 95 F.3d at 1510; Wheeler, 62 F.3d at 640, we must ascertain whether the medical benefits here were vested at the time MSA sought to recoup them under the 1993 amendment. In making this assessment, we apply "the principles of contract interpretation." Chiles, 95 F.3d at 1515. We are also guided by the Supreme Court's admonition that "ERISA was enacted to promote the interests of employees and their beneficiaries in employee benefit plans, and to protect contractually defined benefits." Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 113, 109 S.Ct. 948, 956, 103 L.Ed.2d 80 (1989) (internal quotations and citations omitted). In general,

[c]overage under a medical insurance policy or plan is normally triggered by one of two events. If a policy insures against illness, coverage for all medical costs arising from a particular illness vests when the illness occurs. If a policy insures against expenses, coverage vests when the expenses...

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